Accounting standard

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Financial statements prepared and presented by a company typically follow an external standard that specifically guides their preparation. These standards vary across the globe and are typically overseen by some combination of the private accounting profession in that specific nation and the various government regulators. Variations across countries may be considerable, making cross country evaluation of financial data challenging.

Publicly traded companies typically are subject to the most rigorous standards. Small and midsize businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on the cash method of accounting which can often be simple and straight forward. Larger firms most often operate on an accrual basis. Accounting standards prescribe in considerable detail what accruals must be made, how the financial statements are to be presented, and what additional disclosures are required.

Some important elements that accounting standards cover include: identifying the exact entity which is reporting, discussing any "going concern" questions, specifying monetary units, and reporting time frames.^[1]

Limitations

Accounting standards were largely written in the early 21st century. Massive accounting irregularities at large firms such as Worldcom and Enron illustrate that despite all these efforts, widespread fraud can still occur, and even be missed by the outside auditors.

Benefits of accounting standards

The lack of transparent accounting standards in some nations has been cited as increasing the difficulty of doing business in them. In particular, the Asian financial meltdown in the late 1990s has been partially attributed to the lack of detailed accounting standards. Giant firms in some Asian countries were able to take advantage of their poorly devised accounting standards to cover up immense debts and losses, which yielded a collective effect that eventually led the whole region into financial crisis.

Common accounting standards around the globe

• International Financial Reporting Standards

This standard is adopted in whole, or in large part, by many countries. Its acceptable in the U.S. (for a firm located outside of the U.S.) to report in this widely accepted format.

Accounting standards by nation

• China - Chinese Accounting Standards (Zhōngguó qǐyè kuàijì zhǔnzé 中国企业会计准则)
• Canada - Generally Accepted Accounting Principles
• France - Generally Accepted Accounting Practice (Plan Comptable Général)
• Germany - Generally Accepted Accounting Practice (Grundsätze ordnungsmäßiger Buchführung)
• India - Indian Accounting Standards
• Luxembourg - Luxembourg Generally Accepted Accounting Principles (Lux GAAP)
• Nepal - Nepal Financial Reporting Standards
• Russia - Russian GAAP
• United Kingdom - Generally Accepted Accounting Practice (UK)
• United States - Generally Accepted Accounting Principles (United States) Domestic firms typically report in this format. Foreign firms that trade in the U.S. typically report in IFRS format (above).

Global standardization and IFRS

Many countries use or are converging on the International Financial Reporting Standards (IFRS) that were established and are maintained by the International Accounting Standards Board. In some countries, local accounting principles are applied for regular companies but listed or large companies must conform to IFRS, so statutory reporting is comparable internationally.

All listed and grouped EU companies have been required to use IFRS since 2005, Canada moved in 2009,^[2] Taiwan in 2013,^[3] and other countries are adopting local versions.^[4][5]

In the United States, while "... the SEC published a statement of continued support for a single set of high-quality, globally accepted accounting standards, and acknowledged that IFRS is best positioned to serve this role...."^[6] progress is less evident.^[6][7]

See also

• Center for Audit Quality (CAQ)
• Constant item purchasing power accounting
• Convention of consistency
• Philosophy of accounting
• Statutory accounting principles for insurance companies in the US

References

Further reading

• Meeks, Geoff, and GM Peter Swann. "Accounting standards and the economics of standards." Accounting and Business Research 39.3 (2009): 191-210m

External links

• FASAB Handbook of Federal Accounting Standards (2014)